By Daniel Pessar (Harvard Law School ’20)[*]
There is something fun about watching how the built environment improves over time. Updates to historic buildings, maintenance of hiking trails, and the construction of indoor skydiving venues can all offer a sense of excitement and variety. But some sites attract little investment and attention, lying vacant for years.
Sometimes this can happen when there is a contamination concern at the site. The property might be a “brownfield,” the name for
real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.
Comprehensive Environmental Response, Compensation, and Liability Act (also known as CERCLA or the Superfund law) 42 U.S. Code § 9601(39)(A)
Environmental hazards at a property can represent increased costs, project delays, and liability for developers, making the property less attractive for development. Further complicating the possibility of investment is the difficulty involved in assessing the extent of the hazard. Learning more about site remediation needs, if any, may require boring, scraping, and drilling in order to test what is beneath soil, concrete, or building materials. And the cost involved in this determination could rise to tens of thousands of dollars or more—just to find out if the project is worth all of the necessary effort and expense.
For example, a well-known Virginia restaurant (pictured above) which closed in 2004 became an expensive project to redevelop because of the high concentrations of lead and asbestos found inside. Asbestos, associated with lung cancer, mesothelioma, and asbestosis, must be handled in accordance with very strict environmental guidelines. These rules include special requirements for notification, permitting, inspection and identification, removal, storage, disposal, and transportation.
There is a broad array of grant funding at the national and state levels to support brownfield remediation and development. And, as of recently, there is a new incentive available: developers who purchase brownfields in opportunity zones can qualify for special tax benefits.
Introduced by the 2017 tax reform act, the opportunity zone laws encourage new capital investment in designated low income communities called qualified opportunity zones (QOZs). To qualify for QOZ benefits, investments need to involve the purchase of new assets or the substantial improvement of existing assets. This requirement reflects Congress’s concern that investors would try to obtain benefits by simply moving existing assets into QOZs without stimulating new economic activity.
But brownfields have a special status under the final regulations issued in December 2019.
An eligible entity that purchases a parcel of land that is a brownfield site… may treat all property composing the brownfield site (including the land and structures thereon) as satisfying the original use requirement… if, within a reasonable period, the eligible entity makes investments in the brownfield site to ensure that all property composing the brownfield site meets basic safety standards for both human health and the environment.
85 FR 1988
Normally, land and existing buildings need to be improved by certain dollar amounts and within certain amounts of time in order for investors to enjoy the QOZ tax benefits. The final regulations give more flexibility to brownfield developers performing remediation. Even if investments are lower and timelines are longer than typical QOZ investments, brownfield investors can obtain the tax benefits. This accommodation reflects the IRS’s appreciation for the uncertain budgets and schedules involved in brownfield cleanup as well as its recognition of the good that can come with brownfield remediation. The IRS makes this priority clear in the final QOZ regulations:
Cleaning up and reinvesting in [brownfields] increases local tax bases, facilitates job growth, utilizes existing infrastructure, takes development pressures off of undeveloped, open land, and both improves and protects the environment.
85 FR 1911
[*]Daniel Pessar is a third-year student at Harvard Law School. Before law school, he worked in the real estate investment industry for six years. He is the author of three books and numerous articles. He can be contacted at dpessar@jd20.law.harvard.edu.